A research project based on a real case study.
Blockchain technology has made it possible to democratize industry specific assets of almost all sectors of business through the immutability, transparency, and efficiency that it offers. Due to this innovation, it created a completely new asset class coined cryptocurrency, which now has morphed into smart contracts, complex financial products/derivatives and into decentralized finance (DeFi).
Lattice (LTX) is a (DeFi) platform that is built with both Ethereum and Constellation’s Hypergraph Transfer Protocol (HGTP). It is the first D’App to be built atop of the Constellation blockchain – leveraging the many advantages of its Hypergraph Transfer Protocol to introduce a new paradigm of innovation within DeFi applications. With a vision to set the standard for the future of crypto asset trading, Lattice aims to empower users through their advanced Automated Market Makers (AMM) algorithms, while setting new standards for true cross-chain liquidity pools.
Soon after Ethereum’s state of the art smart contracts were introduced back in 2016, a small group of incumbents foresaw the issues that would arise through the continued adoption and wide scale use of this technology. The team behind Constellation realised that in order to have a scalable zero-trust network, which supports real world applications, and sets the standard for an interoperable blockchain that would be able to transact with both on and off chain data cohesively, then Ethereum alone would not suffice. It is much clearer now, that the Ethereum network irrespective of its innovative grandeur, lacks in several areas that malign its road to mass adoption and use.
While smart contracts are effective in their execution, they are limited in functionality by numerous factors that hold the Ethereum blockchain from hyper-scalability and mass adoption. Factors such as the limited amount of information that can be stored in a smart contract, the speed of the network (unprotected from black swan events), and the related cost per transaction. When all of these are brought together, the root of their limitations lay within the single proof of work consensus mechanism. In other words, the inherent design of the Ethereum blockchain was not suited for mass adoption and use of the technology as intended. This has been proven true many times over the past couple of years. A case in point being when the virality of the ‘CryptoKitties’ game back in 2017 throttled the entire Ethereum network with an increased amount of transactional volume which in turn significantly rose the transaction costs. Black swan events such as these pose a significant risk to all forms of traded value that a blockchain (especially Ethereum) is veneered for.
Constellation – a better alternative to Ethereum
The Constellation network gets to work where the Ethereum network runs short of its capacity to scale. The network leverages its Hypergraph Transfer Protocol (HGTP) to uniquely evolve how businesses can take advantage of the benefits of blockchain technology in an infinitely scalable and truly decentralized manner. The protocol’s data structure based on a directed acyclic graph (DAG) uses dynamic partitioning to ensure an efficient distribution of data across a decentralized distributed network. Simultaneously the Hypergraph Transfer Protocol (HGPT) uses the same dynamic partitioning across a reputation-based consensus mechanism that works towards giving all users within the network power, through not only their holdings of the network token but also through their interaction with the network itself – akin to a credit rating within the current financial system.
Both the DAG and the HGPT combined with mathematical proofs result in an effectively organized network, which then results in a system that can cater to higher throughputs and successfully process near real time data. Unlike smart contracts that are governed by the Ethereum blockchain, Constellation’s ecosystem and architecture allows for the development of applications that are connected to traditional data networks. This results in a protocol that can communicate with all forms of data: both on the blockchain and that which within centralized systems (off chain). By virtue, this makes the HGTP a world first open communications protocol that allows data from external applications to flow through and connect with a blockchain in a tokenized manner.
The biggest difference in terms of application between Ethereum and Constellation is the advent of the industry being targeted. Ethereum’s Consensys and their governing smart contracts target the supply chain management sector whereas Constellation’s SPORE (akin to Consensys) and its microservices/ state channel support that weaves in between all software applications, targets the multi-trillion-dollar big data sector. Some applicable use cases include quantitative trading within traditional securities and finance, 5G which then enables the multi-trillion dollar Internet-of-Things sector to make autonomous vehicles a true reality through artificial intelligence, and the multi billion dollar data management sector. All the above create massive amounts of data that need to be processed, across many verticals and ecosystems. Constellation brings immutability, auditability, and tokenization to the data that the above industries create making them truly be disruptive in nature and make conducting business more efficient while also assisting in achieving mass adoption for new industries.
DeFi was made a reality through the introduction of smart contracts nestled within the Ethereum blockchain. The introduction of this new form of financial service brought speed, efficiency, transparency, and immutability to many siloed verticals and use cases such as savings, loans, insurance, payments, asset tokenization, decentralized exchanges, and KYC/AML assurance. Siloed, since the information within these verticals is all sourced internally through the data provided within the respective smart contracts. Amongst the most important use cases surrounding DeFi is the advent of automated market makers (AMMs). Through the implementation of a permissionless liquidity pool of ERC20 tokens, AMM smart contracts algorithmically allow users to trade (swap) tokens against the pool’s latest prices for the respective token. This varies significantly from the traditional limit order-book system that exists in most exchanges.
Now with most DeFi applications being built atop Ethereum, the issues within the blockchain trickle down to affect all the D’Apps built on the platform. DeFi applications are stricken with the same scaling limitations which then invite costly transactions and even slower transaction times that plague the Ethereum blockchain on a large scale. Amongst slow and costly transactions, lie the inability of all DeFi applications to not be able to transact with and handle any external data from centralized sources such as that from traditional financial and securities markets. Even with the advent of Eth 2.0 launching on December 1, 2020, which attempts to significantly make the network faster and more scalable, the solution still comes with limitations as it is unable to fully drive the true scalability needed for mass adoption and its subsequent entry into disrupting the traditional money markets. Prior to Eth 2.0, the solutions posted for DeFi applications came across as nothing more than mere band aids. Having transaction fees programmed into the core protocol, using a single non-concurrent consensus mechanism all while having a linear architecture all contribute to the leaking of value from even the most sophisticated DeFi applications.
Lattice Exchange – DeFi 2.0 and its AMM structure
Due to a growth in awareness of DeFi, it has become ever more pressing to build user centric DeFi applications. Applications should accommodate low transaction fees, provide a greater amount of liquidity, and allow cross chain interoperability. The future of DeFi relies upon the interoperable nature of networks and ecosystems so that their combined use cases increase product offerings and features such as aggregating liquidity pools, intelligent routing for trades and the implementation of multiple asset-specific automated market making algorithms.
This is where Lattice comes in. Just like how Constellation picks up where Ethereum lacks in terms of functionality, Lattice picks up where current DeFi solutions stagnate. Lattice is the first end-to-end framework and crypto business built on the Constellation blockchain that attempts to introduce a paradigm shift in crypto asset trading products, that which is on the cusp of defining the future of cryptocurrency trading. Lattice revamps DeFi applications by offering thicker liquidity and access to an increasingly faster, cheaper, and more efficient asset-specific automated market making algorithms for both traders and liquidity providers. Lattice paves way by implementing technology and infrastructure which greatly improve and advance the blockchain industry with financial instruments that have the same calibre in terms of speed, security, and scalability as that of the traditional money market industries. By addressing the market needs of current DeFi bottlenecks, Lattice aims to thereby bring democratization, true decentralization, institutional grade reliability, and usability to the world of open finance.
Since Lattice is built on Constellation, its service offerings employ the advantages that Constellation provides.
Flexible Liquidity Pool
This gives lenders that ability to earn transaction fees on their staked deposits. Token asset swaps can occur between ERC-20 and Constellation’s native token DAG. Normally token asset swaps only occur on a single network (Ethereum) but due to Constellation’s cross-chain interoperability, Lattice will be able to accommodate not only ERC-20 to DAG cross chain pools and swaps but also to many other decentralized ecosystems and native chains. The latter is planned for buildout in 2021 and beyond.
Automated Market Making
Following flexible liquidity, comes the advent of automated market making which is implemented in a cost-effective manner due to the almost feeless design of the Constellation protocol. DeFi 1.0 involves 3 types of fees for traders, these are: on deposit/withdrawal from the pool along with trade settlements. Lattice removes the complexity in the fee structure and offers a fee scale which does not increase as network adoption increases (as with Ethereum). While keeping fees low, automated market making on Lattice benefits from Constellation’s DAG based database architecture which gives the exchange infinite scalability and faster transactions. Furthermore, the consensus mechanism used for Constellation runs in parallel to the distributed database, which by design means that the network would not be throttled / weighed down upon during any surge in platform utility.
Advanced Matching Algorithms
Due to Constellation’s ecosystem being able to tokenize external data, the advent of advanced matching algorithms becomes possible. Not only can the Lattice network implement simple Automated Market Making algorithms with more efficiency and scalability, but it can also do the same with multiple asset specific AMMs.
Constellation’s microservice framework, the HGTP and its reputation based concurrent consensus mechanism – Proof of Reputable Observations – open the floor to support complex data structures and oracalize data so that institutional grade AMM algorithms can be deployed with scalability and no bottlenecks on throughput. Through this, Lattice is taking digital asset trading to the same calibre as traditional money markets and eventually, be able to employ the advantages of blockchain technology to the $30T traditional securities markets.
Lattice (LTX) Governance Token
The native platform token called “Lattice” (LTX) gives power back to the user by giving them network governance rights along with incentivising trading on the platform. The token governs agreement on transaction fees (if any); on both trading and deposit/withdrawals, farming reward structures (provides incentives for liquidity providers to contribute to trading pools), and token value inflation/deflation (LTX burn), along with the implementation of Lattice Exchange policies and proposals. The uniqueness of the Lattice token is that DAG holders are able to provide liquidity to trading pools just like LTX holders, thus rewarding them the same as the latter. This further reduces the need to dilute the ecosystem with airdrops and drives value by increasing liquidity for asset specific cross chain tokens. Eventually Lattice will be able to host more complex AMMs, connecting the Lattice token to the entire ERC-20 ecosystem in a cross-chain liquid token format.
Real Cross Chain Liquidity Pools
Decentralized exchanges such as Uniswap have single chain liquidity pools with cross chain interoperability possible through the wrapping of digital assets from other blockchains (USDT, USDC) to allow them to transact within the Ethereum based D’app. Wrapping offers the benefits of speed and cost effectiveness as it does not burden either blockchain in order to complete the transaction, while only costing a singular Ethereum gas fee to complete. However, due to the single non-concurrent consensus mechanism of Ethereum, democratization in terms of access to the network is slim in an ecosystem that is governed by the “whales” of the network. Smaller players are being out priced when it comes to transaction costs making the singular Ethereum gas fee inaccessible for business models looking to develop and scale on the platform. Ethereum competitor Polkadot attempts at cross chain interoperability at a much higher throughput but still relies on existing approaches to fully implement cross chain transfer of value. Due to this, Polkastarter, Polkadot’s Uniswap equivalent allows for cross chain liquidity through similar existing “band-aid” methods that either are solving the cross-chain liquidity issue or are tackling network scalability (albeit not infinitely) – but never both at the same time.
This is where Lattice differs and eloquently provides solutions to both issues mentioned above. Due to the advent of the Constellation blockchain, Lattice does not need to wrap any digital assets to implement cross chain liquidity pools. Instead, Lattice allows for the direct atomic swapping of any digital asset in real cross chain liquidity pools while providing seamless interfacing of ecosystems and the corresponding assets. By virtue, this makes Lattice the first in the world amongst all DeFi innovations to offer an implementation of cross chain liquidity pools in such a way. And as mentioned before, it can accommodate all this, while being infinitely scalable – where network participation is not saturated by whales.
Realizing the true potential of Constellation’s design and ecosystem, it can be seen that this DeFi use case is not only limited to Lattice, but rather Lattice is merely a proof of concept to show how the HGPT can be utilized in spearheading a new ecosystem. Infinite scalability, affordability, and democratization gives predictability to business models and thus provides a strong argument for why future DeFi solutions should be built on the Constellation network.
LTX Sell Off – November 6
Lattice had a lot of hype gearing up to the ICO and individual IEOs conducted on Hoo.com, Bitribe and BitMart, respectively. It launched on Hoo.com, Bitribe, BitMart, MXC and bithumb in the early hours of November 6, 2020 (EST). Along with being listed on the aforementioned centralized exchanges (CEXs) Lattice also lists on a decentralised exchange (DEX) called Uniswap at around the same time as the other exchanges.
The launch was received with a lot of optimism and support by both the community and retail investors. However, 15 mins after the token went live on Uniswap, a large amount of price volatility began occurring with the price reaching as high as $0.54 and then subsequently dropping to $0.10 as seen in the image below.
Between 6.45am EST on November 6 to 7.00am EST over $210K worth of LTX had been subsequently liquidated from the exchange.
The IEO conducted by all exchange partners had a maximum deposit of $100-$5000 per user. Which confirms that if a sell off valued at over $210K occurred, then it must have been driven by private stakeholders aka “whales”. Below are excerpts from the Lattice token sale which confirm the maximum position a retail investor could hold at the time of the token sale.
With the sell off in full swing, Lattice made a public announcement on Nov 6 at 11.45am EST that they will be delisting from Hoo, citing irregular activities and ethical concerns.
Following the statement by Lattice, Hoo.com announced that they will be giving refund rights to users that took part in the LTX IEO on the exchange.
This move by Hoo can be seen as a direct retaliation to that of Lattice’s in order to keep Hoo’s credibility intact. However, even after this, Lattice continues trading on Hoo.com.
Soon after, BitMart announced on November 7 that it will be delisting Lattice (LTX/USDT trading pair) on November 9, as it violated its minimum price guarantee which denotes that the price of a newly listed token won’t fall below its listing price, (which in this case was $0.35) for the first 72 hours of trading. Following suit, Bitribe decided to announce that it too will delist the LTX/USDT currency pair on November 12 citing concerns about the overall health of the project. As of right now, LTX continues to trade on Uniswap, bithumb, MXC and Hoo.
Diving deeper into the sell off it can be seen that LTX’s negative price volatility on Uniswap was replicated on other exchanges almost immediately. This tells us that there is a possibility that private stakeholders that used either Hoo, BitMart or Bitride to take part in the token sale used Uniswap to liquidate their holdings. Since Uniswap is a decentralised exchange, the barrier to entry is much lower; due to no account creation/ KYC/identity verification process, resulting in quick access to funds while maintaining anonymity.
Below is the breakdown of the liquidation event that occurred in the morning of November 6 (EST). As seen below, each 15 minute interval is colour coded. The exact whale transactions that occurred during the specified time interval can be found in the appendix of this report. The value of the selloff is calculated with reference to the trading price of Ethereum at the time – $456.32.
The sell off was led by Uniswap as mentioned earlier but later confirmed by the analysis of the subsequent transactional data related to LTX (refer to the appendix for the complete list). It can be safely deduced that due to “whale liquidation” of LTX on Uniswap, FOMO kicked in from retail investors and this further contributed to the liquidation event. Looking at the 6.45-7.00am interval, approximately $184K worth of LTX was liquidated from Uniswap whereas the entire volume of the sell off was over $211K. This means that approximately $27K worth of tokens sold in that time interval were from retail investors. This analysis ends around 11am since that is when all transactional volume reduces to a minimum, as the market absorbs and recovers from the mass liquidations and hyper volatility. Though this analysis is only examining the whale trading activity for November 6, LTX continues to experience high volatility in trading over the next month as it attempts to find ground again and while continuing to establish its foundation for growth.
Why is the future bright?
With all the negative market sentiment surrounding the Lattice project due to the whale liquidation event and the subsequent delisting of LTX from certain exchanges, comes an opportunity to differentiate between temporary and permanence.
History has shown that any sort of a price setback for a value-adding digital asset (be it Ethereum after the DAO hack or Bitcoin after the Mt. Gox) that occurs from a negative event has never been permanent. The differentiator between the price change being permanent or not lies within the project’s overall intrinsic value. If a project is actively driving value towards a need/pain point that exists, then with the timely implementation of all other aspects of product development, the project in the long term will always prevail. This is akin to Amazon during the dotcom crash where the stock price was tumbling due to a change in the market sentiment towards “The Internet”, all while internal metrics for the company were on the rise. Amazon as a company was not valued at by a temporary change in their stock price but rather their continuation forward to market leading innovation.
Most businesses attempt at solving problems that exist in the present. However, there are a select few that work on problems of tomorrow. Back in 2017 when Ethereum was only 3 years old, the team behind Constellation realised that there will come a time where Ethereum (which was the state of the art at that time) would not be sufficient in catering to the needs of the network. With respect to intent and foresight, a product really embodies the mantra of constant intrinsic value development if it not only provides solutions for current pain points/needs but also is cognisant towards the needs of the future. Since Lattice embodies the aforementioned principles at its core, the price setback due to the whale liquidation event should only be termed as temporary and be seen as a buying opportunity.
External Backing and the future of Decentralized Finance
Unlike most cryptocurrency projects where the token sale is the sole avenue of cash injection, Lattice, prior to launch, had already acquired backing from institutional investors such as Global Digital Assets, FBG Capital, Hillrise Capital, Alphabit Fund and Moonrock Capital. This additional credibility further adds on to the permanence of the project and its long-term vision of being the cornerstone for the mass adoption of DeFi. Uniswap, a decentralized exchange is one of the most popular DeFi platforms available right now. Recently, the exchange saw its monthly trading volume surpass Coinbase, which provides further credence that decentralized finance is here to stay.
Compatibility with non-blockchain products and systems
Living in the data economy, nearly everything we interact with daily produces/uses/stores data. Data improves user experience in all types of applications. Constellation was designed to connect centralized systems with decentralized networks so that data can for the first time be able to travel freely between blockchains and real-world applications. With the ability to integrate with traditional data management solutions like Cloudera and Splunk, or data processing tools such as MongoDB and Storm Constellation and its HGTP become the first network to provide leaderless authentication while providing scalable cryptographic security to data pipelines. Lattice’s ability to communicate with centralized data centers allows for the implementation of complex AMMs – a market first, amongst other things. Betting on Lattice means betting on Constellation and with the optimizations and efficiencies built into the network, amongst being a market leader in the DeFi space, it is safe to say that unless the problems of the future suddenly disappear, Lattice will be here and most definitely relevant.
Along with being able to tokenize external data, Constellation’s DAG was designed with Scala and Java. This is significant as this allows for easy integration and ease-of-use for programmers worldwide. Unlike Ethereum, Constellation is language agnostic, which allows developers to create applications in any language. The network has no barrier to entry for developers to begin deploying applications and business models on the platform – something that is unheard of within the blockchain space. This will further pave greater adoption at a much faster rate than what is observed today with traditional blockchain applications.
Lattice is built on the Constellation blockchain which is a full-blown competitor to both Ethereum and Polkadot. The Constellation team consists of a well-balanced blend of both technologists and experienced businesspeople. Together, they have successfully built out a base layer 1 infrastructure along with developing an entirely new consensus mechanism – based on algorithmic reputation – whose main net has been deployed since May 2020. Along with this, they have a working contract with the United States Air Force assisting them in providing scalable DLT infrastructure that helps tokenize data that can be accessed anywhere through a “Zero Trust” system. Apart from the U.S. Air Force, Constellation has contracts with many other government agencies, as it provides them with custom solutions and paves way for true decentralization. In a recent interview, Benjamin Jorgensen, Co-founder of Constellation was quoted saying, “Lattice is our second venture, and we are getting stronger and faster at building”, which showcases the passion, grit and determination of the team and how important the journey is to them.
The last time a blockchain project challenged the blockchain status quo, the Ethereum project came to life. Lattice and Constellation are attempting to do to Ethereum what Ethereum did to Bitcoin – create a solution for all the weak notions of the previous version of the technology. Ethereum will age well but it might (or might not) be relevant in the future where Constellation sees a significant market share through the vast majority of use cases developed on the network. Even though Ethereum made DeFi possible, it will be Lattice that will take it one step closer by realizing the benefits of both centralized databases and a truly decentralized ecosystem. DeFi 2.0 is officially here with the Lattice Exchange striking home in both business and technology metrics due to being powered by the epitome of distributed ledger technology; Constellation and its HGTP. The Constellation network is at the forefront of innovation, as the “Digital Age” gets comfortable by being driven by true decentralization, full democratization, efficiency, integrity, and infinite scalability – all that which will be needed to tackle the problems of tomorrow.
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